Category: Financial Issues in Retirement

Recently the Wall Street Journal polled their readers regarding their biggest retirement surprises. The responses were varied and expressed more joy than pain, and more satisfaction than frustration. In Parts I and II of this series I recounted a number of the good surprises. In the final post of the series I want to share some of the bad surprises.

BAD SURPRISES

Boomer Attitudes, top concerns as we approach our retirement

Most common among the bad surprises experienced by the retirees was that it was painful leaving work. And in fact, more so than expected. This idea was expressed by many and in many different ways. Several expressed missing being a part of a team at work. One expressed it this way. “It was very surprising to encounter the depth of the loss of not being part of a team doing important work.”
Others expressed the fact that their self value and identity was entirely driven by their position. “I used to define myself by my title. I had flashy business cards, a company car, and a generous expense account. Without these, I didn’t know who I was. I felt naked.” I believe this woman from California describes beautifully what many of us felt upon leaving our careers behind.

One simply said that his biggest surprise was the challenge of figuring out “the Second Act.”

Some missed the pay aspect of work once they had retired. One in particular struck me. He filled his retired life with time with grandchildren, church activities, exercise, academic studies, reading, and walks on the beach. As perfect a picture as this is, he still really misses being paid for work.
On this same subject, one indicated that finding a rewarding post-retirement occupation had been problematic. He expressed surprise that in spite of his very impressive resume and a somewhat aggressive search for an interesting position, there was no interest shown by the companies he approached. He assumed his age (70) was the main obstacle preventing at least some interviews.

Some responded that their biggest surprise in retirement was mortality. They went on to say that they had looked forward to many wonderful retirement years with their spouse. Unfortunately, however, one spouse or the other passed away far sooner than expected. One person’s advice as a result was: do not wait until retirement to enjoy life. How sad and tragic that would be!

One person whose health surprisingly began to slip early in retirement advised as follows. Appreciate that every day you are probably as healthy as you will ever again be.

The bad surprise faced by many had to do with the cost of living. Many have been caught off guard and surprised. Different expense categories were cited. Some mentioned the cost of healthcare, more specifically the cost of medicare premiums for Part B, D, and F. Premiums in many cases are increasing by 20% or more annually. Some indicated that household expenses in general were quite a bit higher than expected.
One respondent claimed that his living expenses in retirement were tracking at 100% of his pre-retirement expenses. For most this would be entirely unsustainable. He listed his expenses that were higher than expected: healthcare, travel, recreation, vehicle expenses, and fuel and energy. In this same vein, another individual suggested adding 10% to any expense budget you prepare because there will surely be expenses you underestimate.

“Negative Dan” from Portland, Oregon reported that he has become a charter member of the over-the-hill club. He is now unattached to the business world, a retiree with a gold whatchamacallit signifying his long-term service. In his words, “sadly (he) spends his days striving to create the perception that he still has intrinsic value.” Hopefully there are only a scant few who share his view.

On a lighter note, Arthur believed that in retirement he would play golf all the time. But upon retirement he came to realize that he used to play golf to reduce the stress from work. But now in retirement he finds golf to be stressful in and of itself.

In conclusion, the content for these last three posts came from the Wall Street Journal of February 10, 2017 – “Readers’ Biggest Retirement Surprises.” Clearly for most the biggest surprises they experienced in retirement were positive ones. There are the wonderful gifts of friends and family, and better yet, the time to enjoy them. In addition there is time to focus on exercise and health, travel, and new activities or causes. For most, all of this make retirement a precious gift… even in trying times!

Over the last year we have highlighted just about every reason why millions of Baby Boomers will experience some difficulty achieving the retirement they have envisioned. In fact the problem is bleak enough to be called a ‘retirement crisis’ by social scientists.

There are many contributing factors. These factors are evenly divided between those that are within the control of the Baby Boomers and those that are beyond their control.

However, there is one roadblock to a Lemonade Retirement that we have yet to mention, and that
would be student loans. Student loans, of course, are fully within the control of Baby Boomers. The Federal Consumer Financial Protection Bureau reported recently that people 60 years of age and older owe an estimated $66.7 billion in student loans! By 2015 the number of seniors with student loan debt had grown to 6.4% of the total in this age group. And in the ten years from 2005 to 2015 the average indebtedness grew from $12,000 to $23,500.

Of course mortgage debt is the most common type of debt that Baby Boomers have in their retirement years, but sadly student loans are becoming more and more common. And it should be no surprise that seniors with student loan debt have less retirement savings than those with no student loan debt.

So whose educations are these Baby Boomers paying for? 73% of these loans were for the education of a child or grandchild. And only 27% were for their own education or their spouse’s.

The significant increase in the number of grandparents and parents agreeing to help pay the cost of their grandchildren’s or children’s education coincides with the skyrocketing cost of a college education. But if seniors are living on a fixed income and/or are struggling to save the funds they will need for retirement, they should think long and hard before agreeing to provide such help.

Besides higher education is often not such a great investment…..

Interestingly I am aware of many examples among affluent people who I know whose children’s education has turned out to be a very bad investment. Here’s just one example. The Blacks (not their real name) educate their one and only son in the finest, and priciest, private schools in Baltimore. He then goes on to an exclusive college in upstate New York to major in International Business and Chinese. Everything seems to be on track at what will be a total education cost of about $750,000! But midway through his college career he decides this is not the track for him. So ‘yes’ he will graduate, but probably not in four years. His degree will be in Music. And we will see, but from what I understand, a graduate degree will be necessary to get a job!

Hopefully the point is obvious. Going into debt to finance the education of children or grandchildren in today’s economy may not be the wisest thing for the majority of Baby Boomers to do. Hopefully some will rethink doing this.

On a related note, it appears that many seniors co-sign the loans for a child or grandchild without a clear understanding of the responsibilities of a co-signer on a student loan. The co-signer is every bit as responsible to repay the loan as the borrower. So if the child or grandchild is unable to make the payments because he does not get a job or for any other reason, the co-signer becomes a “co-borrower” and he must make the payments. The moral of this story then, is that parents and grandparents should never co-sign a student loan unless they are willing and able to make all loan payments.

One other warning. When there is a default or delinquency on a loan from a bank or private lender, social security income benefits are protected. However, on government backed student loans, social security income is not protected and can and will be levied by the lender should note payments be in default.

Note from Blogger:

When I came across the content in this post, I found it to be depressing. And I was reluctant to pass it along to my readers. Does it make sense to go into debt late in life paying for your children or grandchildren’s education, if your retirement is not 100% secured? I had no idea it was happening to this extent ($66.7 billion). So I put forth this information to inform all, but hopefully to cause a few to reconsider taking on student loans in their retirement preparation years or later.

We are at the beginning of an aging crisis in the U.S. It was five years ago this week when Baby Boomers began to reach the age of 65 at the rate of 10,000 per day. By 2030 one out five Americans will be 65 years of age or older, and all will desire a Lemonade Retirement for their future.

For the most part, though, these Boomers have not planned well for retirement. Or possibly their retirement plan experienced a major setback. They are moving into a time when their income will be fixed. Close to 40% have savings of less than $50,000.

Furthermore, the results of a recent survey indicate that Baby Boomers hoping to retire soon have no idea how much money they will need in retirement. So if you are among this group you are far from being alone. This has been my argument in these posts several times over the last ten months (it is impossible for anyone to know this all important answer).

So what we do know for sure is that it will be a struggle for vast numbers to retire. The search will be on for new ideas and strategies to make retirements work, financially and otherwise.

This is where home sharing, an outgrowth of the sharing economy, comes in. Home sharing is when two or three people with no familial relationship or romantic involvement come together under one roof to share living costs. It has actually been around for many years. Remember “The Golden Girls”, “The Odd Couple”, and “Three’s Company”. However, fueled by the needs of Baby Boomers it appears there will be real growth in this phenomena in the U.S. beginning in the near future.

It seems clear that this will soon become commonplace for two reasons. 1. It will fill a significant need, and 2. both “for profit” and “non-profit” matching services are beginning to spring up in many states. As an example, Colorado-based Silver Nest is an online roommate matching service which is already doing business in 49 of the 50 states. Silver Nest charges a small fee to both parties to the equation, the homeowner and the renter. In exchange for their fee they do a compatibility survey between the parties. They also do a property verification. And importantly, they perform a background check on the renters.

A little bit more about why this is an idea whose time has come: the majority of Baby Boomers have a declared desire to age in place. But doing this can be a real budgetary challenge because for many Boomers housing cost is their largest outlay. Home sharing will clearly be a niche option going forward providing a way for Boomers to stay in their home as long as possible. It is perfect for the situation where one person is house rich and cash poor, while the other has cash and/or services to provide.

In addition to providing relief from financial stress to one or both parties, home sharing often relieves another problem, and that is isolation. Widows and widowers often struggle with feelings of isolation. It often provides a great sense of comfort just knowing someone else is in the house. In addition, seniors often suffer serious falls in their homes. These falls, if they live alone, can go undetected for days. Further, many Boomers travel frequently for pleasure and to visit family. Many find it preferable to have someone else living in their home while they are away on extended trips.

As a variation on this theme, I suspect there might come a day when home sharing doesn’t begin with a home owner seeking a home sharer. Perhaps it will begin first with friends agreeing to live together in their retirement years. Whether they do so in one of their homes or relocate to a more appropriate place will be the secondary consideration.

In conclusion, home sharing has been quite common for years in other parts of the world, but surely it will soon fill a big need here in the U.S. It’s a good solution to the problem of providing affordable living spaces for aging Baby Boomers. Could you see home sharing in your future? It may be a valuable tool to help create a Lemonade Retirement.

Word Press and Facebook are telling me that the number of readers of Lemonade Retirement are picking up quite a bit. As a result I want to use this first blog post of the new year to highlight the mission of Lemonade Retirement for new readers.

I have come across hundreds of blogs on the subject of Retirement. They break down very neatly into three types:

Financial. These blogs are obviously about how to prepare and execute a financial plan to make a great retirement possible. These blogs are geared to a younger audience than the Baby Boomers who I am interested in reaching.

Lifestyle. These blogs are written by people who are deep into their successful retirements and things are going well. They discuss all matters of topics, both philosophical and practical. They are a group of people enjoying life.

Travel. For many, retirement is for travel. These folks travel all over the world and document, photograph and blog at every destination. What a fun life!

Lemonade Retirement is none of the above.

Lemonade Retirement is for, and about, all of the Baby Boomers who know that for them, retirement may not be a perfectly smooth sail. For the most part they have not prepared and planned well for retirement. Or maybe they had a plan and something happened to upset it. Things happen: the economy, loss of a job, divorce, a health problem or other family emergency.

And then, how much money, between retirement income and savings, will be needed to retire? No one knows the answer!! There are too many variables. It’s determined by life span; and life spans are getting longer with projections that one out of four Baby Boomers will live into their ’90’s. It will also be determined by the cost of living, which is sure to continue to increase. As well, the cost of health insurance may continue to increase annually by double digits. All of these and more determine how much money will be needed to retire, and thus it is impossible to know.

Pensions have largely gone away. 401k plans have been unsuccessful in replacing pensions. A recently retired IRS agent commented that from his experience the only people who are able to save are those who have no children. Close to 40% of Boomers have less than $50,000 in savings.

I could go on about this (wages have been stagnant for twenty years; some have tapped in to their home equity to live; the cost of higher education has gotten stupid; etc.). The point is that, sadly, the result of all of this is that there is a retirement crisis. It is affecting, and will affect, millions of Baby Boomers!

Lemonade Retirement hopes to grow into a vibrant community of these Boomers who have a little bit, or a lot, of uncertainty about what type of retirement they have to look forward to. Many of them (hopefully) will be okay financially, but they cannot be sure. Others know with certainty that the road ahead will have some level of financial difficulty.

I have not come across other blogs which are aimed at this huge, growing community. So I hope to deliver a good place to meet and also some interesting, and perhaps from time to time, helpful content. There will be much that is financial in nature, but much also that is non-financial. Consider glancing at our archive to see our topics thus far.

Here is a partial list of what I believe:

Time is short, and it goes fast. It is far too valuable to trade for dollars.

The above is true even if you do not know everything you will do in retirement or how you will finance it.

What is valuable is family and friends. And, of course, health….but little else.

If it comes down to retire first and then figure out the details OR figure out the details first and then retire — I recommend the former, retire first. (See #1 above).

The secret to health and longevity, is about “eating, moving, and sleeping well” in combination. Look it up.

Last week (“A Meat and Potatoes Guide to a Lemonade Retirement”) I attempted to blow up the ideas typically put forward by Financial Planners.

FP’s like to say that to retire comfortably, couples should have a retirement nest egg of at least one million dollars, but preferably two. In addition, they suggest their clients plan to have as annual income, 80% of what they had pre-retirement (i.e. if you earned $70,000 a year just prior to retiring you will need at least $56,000 of income in retirement). This is often referred to as the “80% Rule”.

I illustrated last week in detail how the Harrison’s planned for their $500,000 nest egg to last twenty five years in retirement. And that, plus their social security income gave them a total income of $65-69,000 per year, 61% of their pre-retirement income.

This post elicited many comments. The comment I got most was skepticism that people can enjoy a Lemonade Retirement on 60% – or even less! – of their pre-retirement income.

I feel a need to respond because this is very important. First, obviously a significant factor in this calculation is whether or not you have a home mortgage. In statistics I have seen, somewhere between 33% and 40% of seniors 65 and older have mortgages. Those paying mortgages or rent will have a higher percentage budget requirement versus pre-retirement income. BUT I stand my my assertion that most of us can live quite well on 60% or less of our pre-retirement income.

Following are the main areas where new retirees are, or will, experience significant savings from their pre-retirement days:

Taxes on income. In retirement tax burdens fall precipitously! The three reasons for this are that 1. income drops significantly lessening taxes, 2. lower income also means a lower tax bracket, and 3. many forms of retirement income are not taxed or are taxed at lower rates. However, this varies state by state. Seniors need to know how their particular state treats the type of retirement income they will have.

Contributions to IRA and 401k retirement plans stop. Leading up to retirement most people are socking away 10-15% of their income. This is a very significant sum.

The significant cost of going to work goes away. That includes things such as commuting expenses, clothing, lunches, and even dry cleaning! Add these costs up and it will be eye-opening.

As seniors go onto Medicare at age 65 their cost of healthcare often drops. It is interesting to note, however, that while healthcare costs for most will usually be lower in retirement, they will not necessarily be low. (Currently, it is projected that a couple turning 65 and going on Medicare will spend $250,000, or about $12,000 per year, on healthcare over their remaining lifetime. This is for premiums, co-pays, deductibles, and prescriptions).

Retired debt. When they begin retirement many people wisely opt to immediately clean up and pay off nagging debt that they carried when working. This debt is commonly in the form of credit cards, retail accounts, and/or lines of credit.

Better spending habits. In retirement when the weekly or bi-weekly paycheck stops coming in, it is amazing how spending habits take a turn for the better immediately. All spending is reviewed. Unnecessary expenditures are cut out (land lines, cable package features, etc.). Sales, “specials” and coupons come into play. The most depressing aspect of this is not how we live going forward, it is recognizing how careless and wasteful we were in our pre-retirement years. A good example in my life was eating out. For about 30-35 years we ate out on average 2.5 – 3 times per week. Now Friday night is “date night” and that is it.

In many retirement households the second car is eliminated. Automobiles are extremely expensive to own and operate when you add up their cost, fuel, maintenance and insurance. Significant dollars to be saved here.

Most retirees do not need life insurance. Life insurance is typically to replace income the deceased would have earned for the benefit of descendants.

These are the savings areas that I can think of. Can you think of others? If so, how about jotting them in the response form to me. I’d love to pass them along to my readers.

In any event, if you were buying into “80% rule” as put forward by the FP community, I hope you are encouraged by this information. Better yet, I hope you can see where perhaps you can enjoy a Lemonade Retirement on even less than 60% of your pre-retirement income! Many are doing so.